Danforth: Demystifying the ‘chargemaster’

If you ever wanted to write a novel featuring wrenching scenes of screeching, bleating victims and number-chiseling that baffled investigators, you would start with “chargemaster” medical rates.

In 2013, the name “chargemaster” slipped into public view, unmasked in TIME magazine. They are a compelling factor driving medical costs for Americans to multiple times what residents in other western countries pay.

“Chargemaster” emerged in Aspen last week when Aspen Valley Hospital CEO Dave Ressler appeared before a business lunch to say that its price list was publicly-available on the web. The list of some 12,000 hospital costs is still impervious, because the medical industry has long wanted it this way. Nobody who’s smart really pays these rates.

Number-crunchers reign supreme. Their job is to set a list of largely fictitious prices that are often quoted as the “starting rate” (rapidly downward) for further negotiations involving insurance companies.

Those left in the cold include those without insurance. They are chased and threatened with ruin by bill-collectors often with little hope of collecting.

Ressler deserves credit for casting light on such murky waters. He noted that urgent medical care is far cheaper at the hospital’s mid-valley clinic at Willits in Basalt. His voice may prod locals to stop avoiding emergency care because they think they can’t afford it.

Legal requirements to list medical prices won’t help much. Ressler pointed out that the lists don’t disclose much, and often don’t include a host of add-ons such as practitioner and medication fees.

Let’s take one example that Ressler covered last week: the cost of 24/7 care and expensive machinery needed at hospitals. This gets passed onto consumers not because hospitals must charge for such “overhead,” but because they choose to.

Cost accountants will tell you of the games involved when they decide how to price any product where “overhead” can be larded in. They often try to divide it up into any thousands of bits and charge each consumer a chunk. But that in no way comes close to the true average cost of individual treatment.

Consider a case of derailed cost-accounting. My friend Jim, who introduced me to printing presses when I least wanted to consider them, helped me pick out a small press when the Daily News expanded in the 1990s. One day, he called to ask for help. He was losing business because other printers would out-bid him on job rates for printing ad flyers. He’d been up all night doing the math and there was no way he could cut his rates. I asked him how he was figuring his costs. He added up everything, he replied.

Jim also ran a thriving business re-selling presses. He leased huge swaths of his building for its machinery. I asked him if he paid that rent during slower seasons when the presses were absent. Of course, he replied.

They represented “fixed costs,” which Jim had to pay whether he used the space or not. They had nothing to do with whether to accept job printing. There, he agreed, he should be looking at the “marginal revenue” from the job — whether he’d be better off taking the job at the end of the day.

Fixed cost, or “overhead” is buried in lots of cost accounting. Jim dropped his rates, got a flood of job printing work, and revenues and profits jumped. All because he considered only marginal, or incremental costs — not the overhead. Why hadn’t he done it earlier?

“Printers know nothing about pricing,” he replied. “They just copy each other.”

Beware the word “overhead.” Aspen Valley Hospital, if its emergency rates are multiple times what they are downvalley, doesn’t need to include overhead in those downvalley rates.

No one is required to bill those who can least afford it. We trust hospital experts to look after us.

Patients in one city searched six or seven facilities and found rates varying hugely for identical procedures. In other cities, patients have reported they have successfully sought bids to perform a procedure.

Here’s another challenge: which prices to disclose? “Chargemaster rates” will deter customers, but far-lower negotiated rates are considered state secrets.

The real challenge will come when all patients can see real actual cost the medical providers negotiate with insurance companies when the providers really want the business.

Scholarly journals took up the case after Steven Brill’s 2013 TIME article introduced Americans to “chargemaster” danger. Most concluded that such lists bear virtually no relation to the actual cost of providing medical care.

A prime factor in the sky-high cost of medicine in the U.S. is secrecy and medical mergers. Your doctor often has no clue as to the cost of the services for which his or her patients get billed. The doctor’s job is look after your health.

Congress may be of little help. Medical interests are free to fund re-election campaigns and — not surprisingly — many do. They simply buy votes.

The average American can go online and knows far more about airline pricing than ever. When was the last time you willingly paid the walk-on “retail” price for an airline ticket? Such a price would be the aviation industry’s equivalent of a “chargemaster” rate.